REVIEW OF DEDICATED LOW-COST AIRPORT PASSENGER FACILITIES FINAL REPORT Prepared for Commission for Aviation Regulation Dublin, Ireland 11TH MAY, 2007 DOCUMENT CONTROL SHEET Client: Commission for Aviation Regulation Review of Dedicated Low-Cost Airport Passenger Project: Job No: JC27014A Facilities Title: Final Report Prepared by Reviewed by Approved by ORIGINAL Name Name Name DARRELL SWANSON ANDY CARLISLE ANDY CARLISLE PETER MACKENZIE-WILLIAMS Date Signature Signature Signature 12.03.07 Darrell Swanson Peter Mackenzie-Williams C:\Documents and Settings\TEMP\Local Settings\Temporary Internet Files\OLK1BB\CAR LCC Benchmarking Draft Final Report Path and Filename 03-05-07.doc Prepared by Reviewed by Approved by REVISION Name Name Name PETER MACKENZIE-WILLIAMS ANDY CARLISLE ANDY CARLISLE Date Signature Signature Signature 04.05.07 Peter Mackenzie-Williams Path and Filename Prepared by Reviewed by Approved by FINAL Name Name Name DARRELL SWANSON ANDY CARLISLE ANDY CARLISLE Date Signature Signature Signature 11.05.07 Darrell Swanson Path and Filename This report, and information or advice which it contains, is provided by Jacobs Consultancy solely for internal use and reliance by its Client in performance of Jacobs Consultancy 's duties and liabilities under its contract with the Client. 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Review of Dedicated Low-Cost Airport Passenger Facilities, Final Report, 11th May, 2007 i EXECUTIVE SUMMARY Jacobs Consultancy UK Limited (JC) is pleased to submit this report to the Commission for Aviation Regulation on a review of the recent development of dedicated ‘low cost’ passenger terminal facilities at certain airports. The evolution of the low cost airline has seen these operators seeking to reduce their overall operating costs through redefining the passenger service and experience provided. The service is based on the basis delivering a lower fare through a lower frills service to stimulate demand. Given the focus on low fares, the airlines have therefore sought to minimise their cost base and in many cases operate out of regional airports where fast turnaround times can be achieved and low airport charges provided. However as the market has evolved, low cost carriers are increasingly serving main airports and as such are beginning to exert pressure on their respective airports to reduce operating costs at the airport. Although airports have adopted incentive mechanisms to promote growth, they are beginning to reflect the changing market base in the provision of new capacity. As such the concept of dedicated low cost facilities, specifically designed for certain airlines or class of carriers is beginning to emerge. The context for the review is the current re-appraisal of airport charges at Dublin Airport and the impending development of Terminal 2. The Commission wishes to gain a better understanding of what other airports are doing in terms of providing low cost terminal building facilities for low cost carriers. The purpose of this report is therefore to review such developments at identified airports to better understand the design and operating characteristics and the resultant impact on airline charges. As agreed with the Commission the following airports with dedicated low cost facilities have been identified as the primary focus of the review: 4 Marseilles 4 Budapest International Airport 4 New York, JFK 4 Kuala Lumpur 4 Schiphol International Airport 4 Frankfurt-Hahn International Airport The review has found that many of the airports were keen to see the growth of low costs airlines but recognised that the current facilities provided for traditional or legacy carriers are not appropriate for low cost airlines if the airport is to maintain competitive charges to continue attracting and supporting LCC growth on a sustainable basis. The airports have responded by either redeveloping existing facilities (old cargo buildings or dilapidated terminals) or building new facilities. Review of Dedicated Low-Cost Airport Passenger Facilities, Final Report, 11th May, 2007 ii FACILITY CHARGES Differential charges exist for the low cost terminals at Budapest, Kuala Lumpur, Marseille and Singapore airports. In each case the differential relates to the passenger charge, and low cost airlines also do not pay for the use of airbridges. The overall charges for use of these terminals vary between around 65% and 76% of the equivalent charges in the respective main terminals. At Frankfurt-Hahn which specifically serves and targets the low cost sector, charges for aircraft turnarounds of less than 30 minutes are 65% of those for services with longer turnaround times. At Amsterdam airport, users of the low cost Pier H and Pier M facilities benefit from an airport-wide 20% discount on landing charges for aircraft which are not connected to an airbridge. However since a primary aim of Schiphol is to attract transfer traffic, the current incentive structure does not appear to provide any pricing advantage for low cost airlines. As well as specific differential charges for low cost terminals, low cost carriers benefit in practice from a range of other discounts and incentives at significant numbers of airports. These are commonly geared to provide discounts to carriers achieving high levels of growth which are more likely to be generated by low cost than full cost carriers. An analysis of the relationship between published charges and actual aeronautical revenue at a sample of mid-sized European airports (including Dublin) did not reveal any significant discounting effects. However, it may be that this would not be the case at smaller regional airports. INDUSTRY OPINION IATA expresses itself as being opposed to differential pricing “in order to maintain fair competition”. It is concerned that differential pricing at one airport can adversely affect the interests of its members which are serving different, neighbouring, airports. However, by calling for a transparent cost justification in those cases where differential pricing is introduced, it appears to accept that further cases of such pricing will arise. ICAO has no objection to differential pricing as long as it is underpinned by a clear cost justification. It argues that differential pricing for low cost facilities is no different in principle to differential pricing between international and domestic passenger terminals. ACI has no formal policy on the development of low cost terminals, but it in general encourages members to offer a diversified range of services so as to suit the greatest possible range of airline users. The recently issued proposed Directive on airport charges provides positive encouragement for the provision of differential levels of service within different parts of an airport, with a correspondingly differentiated pricing structure. However, this encouragement is within an overarching requirement for full transparency in the relationship between airport operating costs and charges. Since pricing at airports regulated on a single till basis does not reflect full operating costs, the justification at such airports of differential pricing is likely to prove extremely complex. It is possible that some cases of differential pricing will prove difficult to justify under a comprehensive cost scrutiny. Review of Dedicated Low-Cost Airport Passenger Facilities, Final Report, 11th May, 2007 iii SUSTAINABILITY The question on the sustainability of dual pricing structures arose because of a number of acrimonious exchanges between full cost airlines and airports which introduced dual pricing. In practice it appears that in most cases, as long as there is a clear cost differential, dual pricing for physically separated low cost terminals will be tolerated by full cost carriers. This position seems likely to be reinforced if the European